Here’s Why This ETF Is a Good Play on Copper
Thus far, 2014 is setting up to be a good year for copper. There are lots of different ways to play the rebound in copper prices. These include physical assets, ETFs, and ETNs that track copper prices and copper companies. I happen to like the latter. However, choosing the one that is the right play can be difficult. Thus, I am recommending the Global X Copper Miners ETF (NYSEARCA:COPX), which I have traded successfully in the last year. This is because investors should consider looking for balanced exposure to all of the copper miners. The price is about right, as many of the companies in the sector have suffered in the last few years. For those who do not want to invest in a single copper miner, the Global X Copper Miners ETF offers exposure to the entire sector.
As a basket of holdings, it tracks the Solactive Global Copper Miners Index, and its holdings include global firms from across the international spectrum. This international fund has roughly $30.3 million in assets, and is currently trading at $9.50. The fund has a 52-week trading range of $8.37 to $12.09. Although the Global X Copper Miners ETF offers exposure to the copper mining sector as a whole, the ETF is thinly traded, with only about 37,000 shares exchanging hands daily. The Global X Copper Miners ETF is advantageous relative to individual companies as it will benefit from the sector moving higher, without the risk of individual company issues that could plague an individual miner. But, why should you consider a purchase in this sector?
First, despite the month to month, housing is indeed rebounding and the economy is slowly improving. Eventually, this should translate to increased demand for copper and subsequent favorable price action. Further, commercial construction is on the rise and it should serve as a catalyst for the price of copper because construction as a whole utilizes approximately 41 percent of the copper consumed in the United States, with direct residential construction constituting approximately two-thirds of the market. There were approximately 194 pounds of copper electrical wire in the average new home constructed in 2013. Office building copper use can trump this significantly depending on the size of the structure. Copper is also used heavily in appliances as well.
But where is the demand? Well, China as a global player is a major source of demand for copper. Global copper consumption is expected to grow by 1 percent to 2 percent annually, on average. Refined copper demand reached 20.4 million tons in 2011 compared with global production of 16.1 million tons for the same time period. China’s demand is the largest and fastest growing of all markets, accounting for over 22 percent of global demand. China’s demand, which has been growing at 15.1 percent a year since 2000, but was expected to slow to 6.6 percent growth in 2013 and hold steady in 2014.
Copper demand has existed for millennia as humans have been using copper since 9000 BC. One reason copper is so important is that it can be combined with other metals to make new materials like brass and bronze. These alloys are harder, stronger, and more corrosion resistant than pure copper. Copper has many unique properties such as, being an excellent electrical and thermal conductor. It is also resistant to corrosion, is non-magnetic, and is recyclable. Further, it’s ductile and easy to combine with other metals soldering or brazing. Given such properties and being far less expensive than silver, copper is frequently used in electronics, locks, water pipes, and in electrical wiring. It is reasonable to expect that an economic recovery that leads to more construction in the commercial and residential sectors should increase the demand for copper, as well as the price of the metal.
The price of copper is on the mend as demand has spiked. Eventually, copper demand will outstrip supply. As copper is on the rebound, investors should be on the lookout for plays to profit from that rebound. While individual companies in the sector can provide adequate exposure, this is a higher risk play as a would be investor is levered to the company’s overall performance. Individual company problems can result in stock losses. A better approach in my opinion is to get broader exposure. Thus, I am recommending the Global X Copper Miners ETF as a premium play that is tied to the rebound in copper demand and prices.